City celebrates Virgin East Coast exit

THE news that the Virgin Trains East Coast franchise is to end three years early in 2020 has been greeted enthusiastically by investors.

Stagecoach shares ended last week 12 per cent higher, and the price had risen by a further 1.67 per cent or 3.0p by 11.45 today (Monday), with each Ordinary share valued at 183.0p.

The troubled franchise is to be replaced by a form of regional partnership with the DfT and Network Rail with the aim of ‘bringing together the operation of track and train under a single leader and unified brand’. Discussions are already in progress, the DfT has revealed.

Transport secretary Chris Grayling ignited a storm of criticism when he announced this change of plan as part of wider announcements about rail policy on 29 November.

Labour’s shadow transport secretary Andy MacDonald slammed the decision as ‘a total smokescreen’, adding: “The real issue is that the East Coast franchise has failed again and the taxpayer will bail it out.”

Mick Cash of the RMT said: “It stinks. It looks like the government rigging the market again in favour of the private sector. This is basically Chris Grayling manning the lifeboats and bailing out Virgin and Stagecoach once again.”

The East Coast contract is currently held mainly by Stagecoach Group but Virgin Rail Group has a 10 per cent stake and lent its name for the franchise brand. The total premiums payable over eight years would have amounted to £3.3 billion, or £2.3 billion at 2015 values.

Operations began on 1 March 2015, when Stagecoach and Virgin took over from the publicly-owned East Coast Trains. This had been the successor to National Express East Coast when that company withdrew on financial grounds in November 2009. However, National Express was not the first East Coast casualty. It had replaced the second GNER franchise, which also foundered. In each case, the premiums promised proved to be unachievable.

The present Stagecoach/Virgin franchise has been following this trend. Although Virgin Trains East Coast presented a brave public face, Stagecoach was forced to admit in June this year that it was facing what critics described as a ‘black hole’ at East Coast of £84 million, and that it would seek to renegotiate the terms of the contract.

At the time, chief executive Martin Griffiths said: “The franchise will have to be reset because the terms and assumptions no longer apply,” but the DfT responded unsympathetically, saying that it expected Stagecoach to ‘honour its financial commitments’. Reasons for the revenue shortfall were said to include the late arrival of Intercity Express trains and infrastructure failings attributed to Network Rail.

Martin Griffiths described Mr Grayling’s new partnership strategy as “a clear statement of intent to seek to negotiate new terms for the East Coast franchise, and we are hopeful of reaching an agreement through to 2020 within the next few months”.

Had it continued, the eight-year East Coast franchise could have come under further pressure in 2021, when FirstGroup is due to launch five daily open access services on the route between London and Edinburgh. Previously, GNER had blamed the arrival of Grand Central open access services between London and Sunderland in 2007 for helping to bring its second contract down.

Reader Comments:

Views expressed in submitted comments are that of the author, and not necessarily shared by Railnews.

Daniel O'Dare, Manchester

The crux of the problem is a Tory blind-faith in the market.
The Einstein quote about 'madness being to repeat the same experiment & expect a different outcome', springs to mind.?
It would appear that there are real problems with this particular franchise, whether they be inaccurate base numbers or unrealistic development opportunities.?
Whatever the actual problems, the facts are that the current plan has now failed 3 times whilst the interim DOR appears to have been a success.? (I have no real figures for whether that is actually the case)
Possibly the ECML might be allowed to be an exception to the current national rail strategy.?

paul, london

national express done the same i think all rail companys needs to brough back to public ownership they should never took it off DOR which was public sctor

Ian Walker, Lancaster

Standing back, it seems that the private sector bids silly money for this flagship franchise and DfT encourages this by accepting the silliest without any reality checks. At a tangent, what happens to the new Open Access service if First wins the re-let franchise in 2020? I was a cynic initially but I have to admit that DOR did an excellent job.

david c smith, Bletchley

Yes , Tim of Plymouth, I think you've underlined a better way forward for those passenger services that aren't captive-market natural monopolies. We need to get away from the state controlled ,time limited short-termist, private monopoly model that is current.

Tim, Plymouth

It's time to try something new.
ECML already has so many Open Access operators that it's the perfect place to trial a complete Open Access system instead of franchising.
Split the current East Coast operation into two competing companies. One gets all the IC225 the other gets all the IC125. Temporarily award each company slots on the railway. eg one gets trains on the hour, the other half hour.
Then over time rebid all the slots so that all the Open Access operators can bid on the slots. Each set of slots would come with minimum requirements in terms of stations that must be served.

All Operators would be forced to accept the open tickets at regulated prices. Season tickets and advance tickets would be up to the operators to sell and compete.

Chris Neville-Smith, Durham

This is probably my #1 argument against the franchising system. It is based far too heavily on which company can offer the most services for the least public financial support (or the highest premiums). That would be fine if it worked, but instead we repeatedly see situations where companies make promises they can't deliver. The borrow Oscar Wilde's quote, to lose a franchise once might be regarded as misfortune. To lose it twice is just plain carelessness. We're now on three.

That doesn't automatically make DOR the better option though, just because it paid premiums. So did VTEC. If you're going to judge on those grounds, judge it on premiums actually paid, not impossible targets missed.

I'm minded to go to the concession model myself. I'm pretty sure Overground and Merseyrail work that way, and they're doing fine.

Neil Palmer, Waterloo

To be fair Virgin/Stagecoach has a valid point about assumptions (promises?) made at the time the franchise was agreed are no longer valid. Those include continued infrastructure failures (down to Network Rail), promised enhancements to the ECML not delivered (down to government/Network Rail), and the FirstGroup open access deal made after the franchise was awarded (again down to a government department). If anything it looks like government has failed to deliver, and changed the rules/playing field, after the agreement was signed.

david c smith, Bletchley

Seems to me like an example of the fundamental flawedness of the current franchising structure.

The original intention immediately post - privatisation seemed to involve franchises as temporary , in which operating companies would have a base, from where they could expand and develop into each other's "territories", with growing competition between them. Those franchises that were natural monopolies would, of course, not have the same developmental intentions.

I wonder how things would be now if this model had been maintained , with long term innovation and investment that would have probably taken place ?
[Slight rewriting of history there, David. Franchises were not intended to to be temporary but other operators were to be allowed to compete. This idea was squashed even before the first franchise had been awarded (in late 1995), as it became clear that a government-awarded franchise could see its revenue eroded by a cheeky competitor aiming solely for the most remunerative times of day. Try searching for 'moderation of competition' for more details.--Editor.]

Christopher Jones-Bridger, Buckley

Each time this contract has been renewed the incumbent transport secretary has enthusiastically greeted it as best value for money for the tax payer. That may have been what the business case predicted but as the third private sector operator heads for the exit perhaps it is time those managing the bidding process threw away the rose tinted specs & had a reality check.

After 20 years of franchise experience it is apparent that the ECML is going to be challenging to manage. Perhaps those managing both sides of the negotiation should be open to a reality check. It would appear that the franchise contract struck between the DfT and the private sector operator has been too inflexible to deal with external shocks whether NR improvement delays, open access operation or the country's changing economic fortunes. The prediction of endless growth was always an optimistic dream. For the sake of stability on the route a degree of contractual flexibility is required for all concerned.

Maybe the returns offered when ECML was operated by Directly Operated Railways weren't too modest. Also as IEP was being procured irrespective of operator there is no reason to suggest that they couldn't have been introduced under DOR.

Anthony Pearce, READING

No-one seems to be able to do the Sums properly on this Line. Either on costs or passenger numbers. Maybe growth is just not possible. Perhaps a new type of franchise should be created. May I suggest one like John Lewis where the staff get a bonus totally dependent on profits. Full scale Nationalisation will only re-introduce all the old problems and result in the pensions of all employees being returned to the State for payment.